The Future Of Financial Services Will Run On Open Rails
2021 was a year of great progress for Open Banking across the EU and UK. The regions witnessed strong growth both in the volume of API calls and the number of third-party providers (TPPs). The sector also got a shot in the arm with the FCA’s removal of the 90-day re-authentication rule and the Competition & Markets Authority (CMA) mandate for Variable Recurring Payments (VRPs).
2022 is proving to be the year Open Banking grows in its scope – geographical and functional. As we looked in our Open Banking report earlier this year, 100+ countries have either introduced or are considering Open Banking regulations. This year, we see significant movement in the US, Australia, India, Brazil, Bahrain, Saudi Arabia, the Philippines, and Nigeria. On the functional side, Open Banking seems to have grown much beyond the banking industry, with Open Finance and Open Data Economies coming into the mix. Open Banking has created an innovation engine for next-generation financial and lifestyle experiences. It is also acting as one of the tailwinds to propel embedded finance experiences that allow non-banks to embed financial products with their core offerings.
In this post, we open the door to the many activities unfolding under the umbrella of open finance and its massive potential in bringing financial inclusion and wellness to both retail consumers and small-medium businesses worldwide.
Mobilizing Moves: Movement Across Activities
At WhiteSight, we have been looking under the hood for the various events that are powering the future of an open ecosystem as we sit to sip some Weekly FinTech Brew. From partnerships to funding rounds to innovative products and regulatory initiatives, the space has been brimming with dynamism as it matures to create long-term value.
2022 has seen several key partnerships between banks, FinTechs, technology service providers, and Open Banking data aggregators to enable the launch of a diverse set of use-cases:
Tink partnered up with An Post, a postal service company, to simplify money management. At the same time, Klarna expanded its partnership with account-to-account (A2A) payment provider GoCardless to allow customers to pay back BNPL balance through bank transfers, save on interchange fees, and protect itself from card-issuer retaliations who the BNPL players have a direct competition with.
Thought Machine, the cloud-native core banking company, joined forces with Salt Edge to offer a pre-integrated solution to comply with global Open Banking regulations.
Zopa teamed up TrueLayer to support Zopa’s ‘Smart Saver’ savings account through instant, secure account-to-account payments that help customers at the start of their savings journey.
As Open Banking gained more traction, more players prioritized innovation around data privacy and customer control. Plaid announced its new privacy portal to enable users to have easy control over their data, while Finicity, a Mastercard company, and Fiserv signed a data access agreement to allow consumers to consent to share data with third-party apps.
What’s more – many of the open finance players put their heads together to bring forth an array of innovative solutions into the picture. Portfolio+ launched its robust cloud platform to help neobanks and FinTechs pivot to the Open Banking movement in Canada. Not only FinTechs, but banks also set out to replace traditional payment methods through the integration of open practices. NatWest teamed up with TrueLayer to deliver its variable recurring payments (VRPs) via its Payit product, allowing customers to connect authorized payment providers to their bank accounts to make payments instead of authenticating each payment separately. Stripe’s grand entry into Open Finance with the launch of Financial Connections was one of the most significant events for the sector in 2022 and has put them on a direct collision course with Plaid. Last year, Plaid announced a move into A2A payments, and Stripe seems to have returned the favor by bringing Open Finance into its portfolio. There were tweets from Plaid executives expressing their displeasure with Stripe's way of getting information on Plaid’s product capabilities.
That’s not all – Numerous regulatory, acquisition, and funding activities have also acted as catalysts in moving the needle for Open Finance. On the regulatory side, key initiatives include the commencement of consultation on adding open finance to CDR (Consumer Data rights) by the Australian government, the launch of the Open Finance Roadmap by Bangko Sentral ng Pilipinas, and the launch of the Regulatory Framework for Open Banking by Central Bank of Nigeria. Several technology players such as Tarabut Gateway, Malaa Technologies, and Rabet in the Middle East and Adatree, Skript, and Bud in Australia received licenses to operate as Open Banking entities.
Revolutionary Evolution: Movement Across Regions
The open market is reaping the benefits of the rise in frictionless interactions to sustain a well-functioning system. Although different regions approach data opening differently, the end goal remains to construct value creations across financial life cycles. That being said, even though the open finance marvel finds its roots in Europe, emerging economies in the Middle East, Asia Pacific, and South America are opening up to the change brought about by big data.
Developed economies such as North America and Europe take the lead in the open ecosystem landscape due to the strong demand for more embedded frameworks, with industry players answering the same through varied offerings. Apple’s acquisition of Open Banking startup Credit Kudos created quite the frenzy of speculations within the space, with a new hypothesis about the move arising almost every other day. Mastercard’s acquired Open Banking specialist Finicity also developed the Payment Success Indicator and Payment Routing Optimizer tools that use advanced data analytics, historical behavioral risk patterns, and machine learning to make the payment experience safer and smarter. Even the Competition and Markets Authority (CMA) announced the Joint Regulatory Oversight Committee to oversee the regulatory framework of Open Banking technology and serve to support a robust evolution for the same in the UK. Additionally, numerous product introductions, such as e-commerce giant Klarna unveiling its Klarna Kosma Open Banking API and Monzo opening up their Open Banking-powered gambling block to all licensed UK Open Banking providers, equally contribute to creating more meaningful open experiences for consumers. In Australia, AdaTree gained a unique designation as a ‘principal’ under the Consumer Data Right (CDR) legislation, allowing it the iteration of CDR-as-a-service where it can act on behalf of other companies and access data for them.
Emerging economies, however, have the potential to benefit more from open access to data, thanks to lower levels of financial inclusion. Many of these countries have undertaken diverse initiatives to ensure the broader adoption of open models in a bid to boost the overall economy. The Dubai Financial Services Authority (DFSA) granted a license to Bahrain-based Open Banking platform Tarabut Gateway, authorizing the company to provide account information services and payment initiation services. The platform also announced four key partnerships in KSA, where it was selected by Riyad Bank, Saudi British Bank (SABB), Alinma Bank, and Banque Saudi Fransi (BSF) to drive the rapid Open Banking innovation in the region and help transform the Kingdom’s financial services.
As for the Asia Pacific region, while the Bangko Sentral ng Pilipinas (BSP) unveiled the ‘Open Finance Roadmap 2021-2024’ aimed to expand financial inclusion in the Philippines, Indian FinTech Razorpay teamed up with European payments network Trustly to enable Indian exporters to grow their business in Europe with features like lower credit card coverage and no chargebacks. Latin America’s Mercado Pago also began its operations as a payment transaction initiator (ITP), a concept brought by Open Banking that will provide access to all information in one place for the consumer to use at their own will. As more and more regions continue to develop supporting infrastructures and regulatory frameworks that go hand-in-hand with open-data enablement, a surge in the economic recovery and value is created for all participants in the financial sphere.
Open Finance: The Flywheel Effect
Although the emergence of Open Banking has led to massive transformation for FinTechs, consumers, and governments alike, several archetypes still remain unexploited in this domain. The evolution of Open Banking to Open Finance and now to Open Data Economies holds the very foundation on which the future of the financial services industry will be built. With A2A payments improving the payment transaction costs and speed, and with financial and lifestyle data becoming the bedrock to creating contextual and personalized financial products, the industry is at an inflection point to reinvent itself. The Open Finance flywheel, which includes Open APIs, A2A payments, and consent-based data sharing across firms, sectors, and industries, will create new value pools and warrant the incumbents and insurgents to transform existing business models and embrace new ones.